Eyeball Networks - Tax Court of Canada finds that a promissory note that was backed only by intercompany debt was worthless

“Oldco,” which had both a largely defunct and worthless business (the “old business”) and a business valued at $30M (the “new business”), implemented a spin-off of the new business to a corporation (“Newco”) incorporated by its sole individual shareholder. The spin-off mechanics were conventional, and at their conclusion, there were two promissory notes for $30M owing by Oldco and Newco to each other – which then were set-off. Newco was assessed under s. 160 for a reassessment that had been made of Oldco following the spin-off.

Bocock J accepted that all the transactions up to the set-off entailed value-for-value exchanges, so that these entailed no transfer to which s. 160 applied. However, he found:

The FMV of the Oldco Note held and owned by Newco was nominal in any fair market for such negotiable bills.

Accordingly, he found that there was a transfer of property for insufficient consideration to which s. 160 applied at the time of the set-off transaction.

The $30M note owing by Oldco was supported, in turn, by the $30M note owing to it by Newco, which indeed had $30M of independent assets. He implicitly appeared to consider that since the only value underlying the $30M Oldco was as described above, rather than there being independent asset backing, that the Oldco note only had nominal value.

Neal Armstrong. Summary of Eyeball Networks Inc. v. The Queen, 2019 TCC 150 under s. 160(1).